Because we can print the money that our debt is in, we need not ever default on our debts. We can simply print money to satisfy them. Therefore, the debt limit does not specify a mandatory legal point of default, but instead specifies a mandatory legal point of printing money to pay for things.

Because of 1, there is no reason to believe that in passing laws of a certain cost, congress intended to pay for it through borrowing rather than money printing, ergo, making a decision to borrow rather than print money seems clearly to be out of the powers of the presidency.

To add insult to injury, all this implies that there IS a legal way out of this mess if we don't raise the debt ceiling, and since it's the only way I can figure out that doesn't require us to either default (unconstitutional), fail to pay our obligations (illegal), or borrow more money (illegal), we actually have to do it. Unfortunately, that way is to cause massive inflation and behave like a banana republics or a failed state.

Now, lots of smart people think a little inflationmight be nice for our economy right now, but somehow I don't think a shot of a couple trillion new dollars straight into the pockets of real people doing actual spending (rather than, say, giant and growing uninvested bank reserves ala QE1&2) is the safest way to do it. Either way, I can't imagine our creditors will be thrilled with the whole "let me print you some money for that bill" strategy, so it would probably do bad things to our borrowing ability in the future, but it seems like the only legal way out. THIS IS STUPID.

Dear Congressional Republicans, I fire you. Love, Rory.

P.S. On an Ironic note, the Gold Bug Anti-Inflation Hawk Republican Congress may be forcing us to adopt highly inflationary policies. I love politics.

Some people think that the Debt Ceiling is unconstitutional, others don't. I think the others are wrong. Here's a sample of the argument against. I feel uncomfortable going head to head against a Harvard constitutional law scholar (though, to be fair, he'll never read this and wouldn't care about my opinion if he did, so that reduces my discomfort significantly), but I have to say that his line of thought seems to be pretty shoddy. Let's take a look at the relevant extract:

Some have argued that this principle prohibits any government action that “jeopardizes” the validity of the public debt. By increasing the risk of default, they contend, any debt ceiling automatically violates the public debt clause.

This argument goes too far. It would mean that any budget deficit, tax cut or spending increase could be attacked on constitutional grounds, because each of those actions slightly increases the probability of default. Moreover, the argument is self-defeating. If it were correct, the absence of a debt ceiling could likewise be attacked as unconstitutional — after all, the greater the nation’s debt, the greater the difficulty of repaying it, and the higher the probability of default.

Other proponents of a constitutional deus ex machina have offered a more modest interpretation of the public debt clause, under which only actual default (as opposed to any action that merely increases the risk of default) is impermissible. This interpretation makes more sense. But advocates of the constitutional solution err in their next step: arguing that, because default would be unconstitutional, President Obama may violate the statutory debt ceiling to prevent it.

The Constitution grants only Congress — not the president — the power “to borrow money on the credit of the United States.” Nothing in the 14th Amendment or in any other constitutional provision suggests that the president may usurp legislative power to prevent a violation of the Constitution

Okay, so, he's right so far as he goes. The argument that the "increased risk of defaulting" is the reason the debt ceiling would be unconstitutional is indeed stupid, for exactly the reasons he points out. Furthermore, his assessment that the president does not have the constitutional authority to borrow money on the credit of the United States is correct. But he's arguing against straw men. The real issue is this: the debt ceiling mandates a default on the full faith and credit of the united states, given certain conditions (the rising of government expenses). Not only does it make this mandate, but forcing a default under this condition is in fact the only purpose of the debt ceiling. It has no other function. In the event that it actually acts, that is what it does. This seems obviously to "question" the "full faith and credit of the United States", and must therefore be unconstitutional.

As to what the president (or anyone) can do about it. It's hard to say. One could argue that congress approved the spending by signing the various bills doing the spending into law, but that doesn't necessarilymean that they approved the borrowing, they could have planned to pay for it some other way. However, since they didn't make any laws to pay for it in another way, one might reasonably assume that they meant for the money to be borrowed, because that's how it works any time we don't run up against the clearly unconstitutional debt ceiling. Ergo, Congress has implicitly approved the borrowing and no one is usurping any legal powers by going ahead and implementing their implied will.

This is all stupid though. We can't enact contradictory laws, and if we do, we implicitly repeal the contradictory bits of the older law. The current contradiction is that in February of 2010, congress passed a law limiting public debt at 14.294 trillion dollars, and since then, has mandated spending and revenue such that public debt must exceed 14.294 trillion dollars sometime in early August. Present law supersedes past law. Problem solved.

Tuesday, July 19, 2011

For most people, borrowing money now means paying back more money later, so of course it seems reasonable to think the same is true for the government, but as Yglesias points out current interest rates on short term loans to the US government are less than inflation expectations. To put this another way. We can borrow 100 real dollars and pay back 95 real dollars (fake numbers for example purposes). THIS IS FREE MONEY. Under these circumstances, it is insane to believe that we need to borrow less in the short term. Obviously these interest rates wont last forever, and are subject to supply & demand &c, but consider that if we refinanced our whole debt at current rates we would effectively reduce its size.

Everyone (sane) agrees that any austerity measure (whether it be tax increases or spending reductions) will negatively impact the economy, so why do it when investors are willing to give us money for nothing (which we could then use to improve the economy through Keyensian stimulus). In the long run, we have a deficit problem that needs to be addressed, but in the short run people are willing to give us free money that can help address our long term problem by a) reducing our real debt long term, and b) allowing us to accelerate the recovery by increasing demand for goods and services through further stimulus spending.

People are complaining that politicians want to kick the can down the road on deficit reduction. It turns out that that's the fiscally responsible thing to do.

The underlying politics is as follows: the American people are sick and tired of deficit spending. The pundits are completely wrong when they downplay this issue, because deficits are FAR worse now than they ever have been in peacetime (10+% of GDP). And they got far worse at almost the exact moment Obama was elected president.

I don't know why people keep forgetting that we are AT WAR, and that this is the first war in American History that wasn't paid for with higher taxes. Maybe I got the direction of that wrong; people keep forgetting that we are at war because we have neglected to pay for the two we are in. And as for the "got far worse at almost the exact moment Obama was elected president" thing, that is completely true, which sort of highlights the fact that he couldn't possibly have been at fault for it. I mean, if we want to talk about deficit spending... the only president who didn't do it in recent memory has been Clinton. I'm really not sure why that would give us the idea that Democrats are the ones who don't care about fiscal responsibility, but that sure seems to be the popular opinion.

The other strange thing about the article is that it starts with the premise that the debt ceiling was a bad place to raise the issue, and ends with the conclusion that Republicans should use the debt ceiling to raise the issue, but consistency is maybe too much to ask for. Still, my complaints about this post have to do with its mission, not its sanity, and I greatly prefer that so kudos to Francis Cianfrocca.

Wednesday, July 13, 2011

I know that most of you didn't need this to believe, but I had to share this snippet from Ezra Klein:

I’m sure all of these theories are at least partially right. But they’re missing the big one that has the best evidence behind it: The unemployed don’t have very much money. And it’s money that gets the political system interested in your agenda:

Gilens has been collecting the results of nearly 2,000 survey questions reaching back to the 1980s, looking for evidence that when opinions change, so too does policy. And he found it — but only for the rich. “Most policy changes with majority support didn’t become law,” Hacker and Pierson write. The exception was “when they were supported by those at the top. When the opinions of the poor diverged from those of the well-off, the opinions of the poor ceased to have any apparent influence: If 90 percent of poor Americans supported a policy change, it was no more likely to happen than if 10 percent did. By contrast, when more of the well-off supported a change, it was substantially more likely to happen.”

If 15 million college-educated professionals were unemployed right now, the political system would care.

I spent a little time trying to find the original study, but I couldn't track it down. I guess you'd have to read the book, but suffice to say that I am not surprised.

It has come to my attention that you are more or less incapable of doing anything in America at the moment. Please quit mucking about and do something useful. A couple basic guidelines:

Evidence - please use it, and please present it in context. Large numbers are scary, but large numbers when compared to other historical or projected large numbers are much less so.

Consistency - I know it is bad politics to hold logically consistent beliefs, but I think that maybe if you don't someone should call you on it, and in a public easy to understand way, not in the clever but not terribly accessible way myfavoritebloggers do.

Point 1 is for the pragmatists. If you care about the impact of your legislation, and not terribly much on the abstract values behind the way it works, then you should be a slave to Evidence. For those of you who are primarily interested in a legislative enactment of some value-system, you should be checking to make sure your enactment doesn't undermine your values by its effects.

Point 2 is for values-politicians. If you're holding a core set of beliefs and want to enshrine them in law, then you should at the very least make sure that they don't contradict each other. For pragmatists, this might not matter as much in your implementation, but you should be watching the aggregate effects to make sure they still do what you hope they will.

I know this is a hopeless and empty plea, but I'm burnt out on real world politics and needed to get that off my chest. Expect more bounds on taxation and other abstract policy discussions in the near future.

It was proposed to me that one possible reason for the results of the "unexpected" difference between the Bush and Clinton economies (that is, that the Clinton tax increase preceded larger growth than did the Bush tax cut), was that 9/11 had a strong negative impact on the economy. It seemed like a reasonable point, so I looked into it. It turns out that a report on the subject was prepared for congress. Short summary: 9/11 didn't have much economic impact. Summary from the report:

The Economic Effects of 9/11:
A Retrospective Assessment
The tragedy of September 11, 2001 was so sudden and devastating that it may be difficult at this point in time to write dispassionately and objectively about its effects on the U.S. economy. This retrospective review will attempt such an undertaking. The loss of lives and property on 9/11 was not large enough to have had a measurable effect on the productive capacity of the United States even though it had a very significant localized effect on New York City and, to a lesser degree, on
the greater Washington, D.C. area. Thus, for 9/11 to affect the economy it would have had to have affected the price of an important input, such as energy, or had an adverse effect on aggregate demand via such mechanisms as consumer and business confidence, a financial panic or liquidity crisis, or an international run on the dollar.
It was initially thought that aggregate demand was seriously affected, for while the existing data showed that GDP growth was low in the first half of 2001, data published in October showed that GDP had contracted during the 3rd quarter. This led to the claim that “The terrorist attacks pushed a weak economy over the edge into an outright recession.” We now know, based on revised data, this is not so. At the
time of 9/11 the economy was in its third consecutive quarter of contraction; positive growth resumed in the 4th quarter. This would suggest that any effects from 9/11 on demand were short lived. While this may be true, several events took place before, on, and shortly after 9/11, that made recovery either more rapid than it might have been or made it possible to take place. First, the Federal Reserve had eased credit during the first half of 2001 to stimulate aggregate demand. The economy responds to policy changes with a lag in time. Thus, the public response may have been felt in the 4th quarter giving the appearance that 9/11 had only a limited effect. Second, the Federal Reserve on and immediately after 9/11 took appropriate action to avert a financial panic and liquidity shortage. This was supplemented by support from
foreign central banks to shore up the dollar in world markets and limited the contagion of 9/11 from spreading to other national economies. Nevertheless, U.S. trade with other countries, especially Canada, was disrupted. While oil prices spiked briefly, they quickly returned to their pre-9/11 levels.
Thus, it can be argued, timely action contained the short run economic effects of 9/11 on the overall economy. Over the longer run 9/11 will adversely affect U.S. productivity growth because resources are being and will be used to ensure the security of production, distribution, finance, and communication.

Now onto the good stuff. Below are reproductions of the charts (in order of information density) from the "several interesting charts" links, as well as the one I made myself. If you're curious about how some economists interpret this data, read the source posts.

Large interactive version of my chart is here.
Small static image below: